People who are young and at the beginning of their investment career often don’t know if they should invest in stocks with little money. Some market participants say, it’s not worth it. But is that true?
If you want to build you a fortune, it’s a good idea to start as early as possible. The longer you’re investing the compound interest. And compound interest is a powerful tool of investing. But when you are young, you may not have a lot of money, but are able to spare a bit and invest it. But is it worth to invest in stocks with little money?
Should you do it?
That is a legitimate question and you will find (as to the most questions) different answers. That you should invest the money you don’t need for a living is beyond question. But investing it in individual stocks is different.
Let’s forget about the many people who would tell you that stock picking isn’t something a newcomer should do. Let’s forget that they believe, an amateur investor is not able to successfully pick stocks. Should they think what ever they want. I’m of a different opinion. And by the way, Peter Lynch is, too.
Any normal person using the brain can pick stocks just as well, if not even better, than the average Wall Street expert. (Peter Lynch)
Investing is fun and exiting, but dangerous if you don’t do any work. (Peter Lynch)
Stocks are affordable
Certainly, stocks can be purchased for a small amount of money. You can buy penny stocks, but I wouldn’t recommend it. But even stocks of good companies are available at an affordable price, apart from Berkshires A-Shares. Let’s take some examples from the Dow Jones Industrial Average. Share prices are dated February 13, 2018.
Cisco Systems $41.23
General Electric $14.67
It seems, with little money you can buy shares of companies many people are invested in. Around $14 for GE is really not much. And even $50 can be raised by the most people. So, if we would stop here, the answer of our question is quite simple –
Well, there are some reasons you may overthink. Although you possibly could afford $14 for GE, you have to pay more. And that’s where all the ones come into play who don’t think investing in individual stocks with little money is reasonable. First thing they say – well it may be second one, but I want to start with it – is that you have to pay transaction fees (and they’re right). These fees are mostly not cheap. I pay around $7+. So it’s 50% minimum of the GE share price. That means, GE stocks has to rise 50% just to get my fees paid. That could really become very, very difficult.
The second thing (or the first, however) is that picking stocks with little money makes a reasonable diversification difficult, if not impossible. Well, that’s true. Let’s assume you have $500 to invest. You can buy 9 Verizon shares with it. That’s obviously no diversification. You can buy You can buy two shares of the companies mentioned above which is a bit diversified, but not really much. That’s why many people will recommend to invest in ETFs, because they are heavily diversified and you only have to pay a little fee. Hence much much better than investing in individual stocks.
Do I say that investing in stocks with little money is not a meaningful thing?
No, I don’t.
Well, it’s right that you can’t diversify like an ETF or a mutual fund with little money. But you don’t have to. Your success doesn’t depend on the broad diversification of such funds. It depends on the picking of the right stocks. And whatever other people say, you ARE able to pick stocks. With a little work which many won’t do, and a bit of knowledge.
You have to consider that a broad diversification implies not only investing in good or great companies, but also in mediocre or bad ones. And believe me, you will find more mediocre companies in the market than great ones. That’s one of reasons why mutual funds don’t beat the market and ETFs only get mediocre returns.
But the fees!
Yes, the fees are worth thinking about. As we see in the example with GE the fees could be heavy in relation to our purchase. And the more we invest at once the lower the fee in relation. That’s obvious. $7 fee of a $70 investment is 10%, but only 1% when investing $700. So, just after an increase of the stock price of 1% you have your fee back when investing $700. And that’s more than possible. After that 1% increase, everything more is your return. But with only $70 investment and 10% fee your share has to rise 10% just to get back the fee. Well, it’s not impossible but more difficult and less lucrative.
So, what should you do?
Well, in the end you have to decide on your own. But if you want to invest in individual stocks witch little money, DO IT! Why not? Okay, maybe buying one share of GE isn’t meaningful. I wouldn’t do it either. But saving $500 over some time and then investing it in some stocks is worth a shot. You have to consider two things.
- If you buy good or great companies which promise a decent return over the long run – and you hold the stocks that period – the fee’s are to neglect. What’s the difference between a 49% and a 50% return. Not that much. It’s only important to get a decent return, not only a mediocre one of 3-5%.
- High diversification is absolutely overestimated. A portfolio with 10 to 20 different stocks should do it. I do not think it’s bad not to have that kind of diversification right from the start. It just depends on diversifying your portfolio over time. Sure, you have to deal with volatility and with losses at times. But, hopefully, it’s just the share price that is down and not the quality of the company. So, you see, it depends on the quality of the company and – surely on the price you pay.
Don’t start with too little money. But $2,000 aren’t necessary either. Don’t let the diversification myth stop you. High diversification is not needed. Think about a reasonable diversification in a meaningful period of time.
And by the way. During the time you save your little money to have enough for a sound investment, you can learn about investing and research companies you’re interested in. You’re not in a hurry to invest. Be patient and know what you do. That’s more important for your success than diversification and starting with a lot of money.